Royalty Pharma plc (RPRX) Earnings Call Transcript & Summary

Friends, I'm Geoff Meacham. I'm the senior biopharma analyst here at BofA, and we're excited to have Royalty Pharma on stage with us. So we have Terry Coyne, CFO; Marshall Urist, Head of Research and Investments, R&I.

R&I, yes.

Okay. So coming off a good 1Q for you guys. Got a new deal going with Sanofi. So maybe just to refresh everyone here, maybe for those on the webcast and just the terms of that and kind of the diligence process that went into that?

Sure. So yes, we're really excited. We announced the acquisition of a royalty on a Sanofi product called frexalimab for $525 million. We bought the royalty from the small private company who originally developed the product. And so just to catch everyone up, this is an anti-CD40 ligand antibody that's in development for multiple sclerosis in Phase III, had some extremely strong Phase IIb data that was recently in the New England Journal of Medicine. And we'll have Phase III data in the 2027 time frame. And so we're really excited about that. Sanofi has talked about it as having nonrisk-adjusted peak sales of over EUR 5 billion. The center of the thesis was really, though, the MS indication, which is where we have -- where all the -- most of the clinical data are. We talked about seeing that as a $3 billion-plus opportunity alone in that one indication. And yes -- and we're really excited. So it's a big royalty, high single, low double digits. We also purchased a milestones -- series of milestones associated with that, that could add significantly to the value as well. So we're excited to have it.

Yes. Yes, Marshall, just along those lines, I mean, I think since you guys IPO-ed and obviously, the -- you guys have acquired royalties for decades. But this one, though, seems like -- it seems like the more recent ones are kind of pipeline and a product type of deals. So, I guess, the question is, I know the answer is probably not by much, but is the process for evaluating products like this in the past couple of years evolved over time, are you looking for different things as some of these -- some therapeutic markets sort of mature and have disruptive candidates that don't have processes -- royalties processes in place?

Yes. I mean one of the big changes over the years has been we've all seen the explosion of the number of sort of companies, new things into across every therapeutic area. The speed of innovation has definitely prompted us to continue to evolve our diligence process. So there's no question that thinking about competitive landscape, not just today, but where it might be, what are real kind of moats around products in this business is something that we've had to do a lot more thinking on, I think, like everyone else around. But yes -- but definitely evolved, and we've -- that's why you've seen us, among other things, we've grown the team. We've grown our kind of research and investments team pretty significantly over the past few years. We've talked about investments in data and other things. And so the key thing is we want to stay at the forefront of accessing kind of every resource we can to make our diligence process as sort of robust and efficient as possible.

Right. Yes. And just really along those lines, when we -- years ago, when there's sort of a wave of new or mostly technology kind of IPOs, those are probably too early for you guys, right? Cell therapy, gene therapy, et cetera. But now you have a situation where a 50-patient Phase I is derisked, your next trial is a Phase III. So it advances a lot faster. So does that open the aperture up a little bit more as we see more of those being validated in the markets?

So yes, there's two interesting things there. I think the first one is, and we probably talked about this back when we were in the sort of platform IPO phase, was that we sort of saw that as an exciting leading indicator because those stories were going to mature, those platforms we're going to have to be kind of focused into specific products. So that's much more in our wheelhouse, right? And I think we're starting to see that today. And you're right, the definition of proof of concept, what is derisked is definitely evolving with time as well. And I think that's why you've seen us get creative also in terms of deal structures. Are there ways when something is a little bit earlier, can we invest smaller amounts and as it gets derisked, we can kind of grow with the product and those kind of themes. We've done some of that. And I think that's something -- definitely something that we'll continue to evolve with.

Right. Right. And Terry, I think the question has always been, is there another Vertex out there, right, a deal with a quite very high magnitude but super high revenue potential? And historically, you guys have just dominated the bigger deals, right? Has that changed over time as some of these private equity and even like private credit kind of firms have expanded it more -- broadly into health care?

So we still feel like we have a major competitive advantage when it comes to the bigger deals because of our scale, because of our cost of capital, because of the fact that when we add a big product to the portfolio, it doesn't concentrate us. It actually diversifies us and because of the team and the reputation that we have. So we think we should continue to maintain a really strong share of the big deals. And there's a lot of them out there. We never know, the stars need to align in terms of when there's a sort of willing buyer, willing seller. But they tend to come along every year or 2. And we're always trying to figure out how we can make deals happen, and there's a lot of them out there.

And same goes for synthetics. Is that still an intended strategy to more of those going forward?

Yes, for sure. There's -- and that's a huge opportunity for us, yes. We -- last year was a record year in terms of synthetics. I think we announced $775 million or so of synthetic deals last year. We think we're still at the tip of the iceberg there. There's a lot of opportunity. The capital needs are massive. Every company now is thinking about royalties as one of the tools that they can use to fund themselves. And I think our position has been that if you're a successful biopharma company and you're bringing a product into Phase III or bringing it to market, you're going to need a lot of different sources of capital and royalties should be one of them.

Right, right. Yes -- and just take a step back, when you think about the -- maybe the negotiation process, I know you guys try to throw up a lot of the -- it's not trivial to develop these drugs. It's not trivial to commercialize them. You have the macro picture. But so I want to ask you is, do you find companies that are looking to sell royalties? Are they thinking that the IRA or elections or policy backdrop, they blow it off and then counter to that, are those -- any of those items for royalties core business? Is that something you take into more consideration now that we're getting closer to?

Yes. So every seller is a little bit different, I think, in the terms of the way that they think about it, what's incorporated in forecast and not. I think we have a little bit of a different style where we -- even in bilateral negotiations, I think, we really price trying to be open about where we might be different and engage in a conversation about it, rather than it being sort of a kind of a bilateral adversarial process, like I can tell you anything about where my forecast is. We sort of welcome that. And it's great because it sort of drives dialogue. We learn something from our partners, they learn something from us. And so we tend to sort of try to push on that a lot, right, sort of get in a room and talk about it. You're right. I think from a diligence perspective, IRA -- beyond just IRA, the Part D Redesigns coming up, other things are happening. And so there's no question that's become a core part of diligence. Every time there's scenarios around that, that we think through. And it's definitely ranges because I think we'd all admit, right? We don't exactly know exactly how it's all going to play out in the fullness of time, but definitely something that we're thinking about trying to do our best to put numbers around.

In your existing portfolio, how do you guys think about that looking to kind of next year and beyond?

So we're pretty fortunate that we don't have much IRA exposure in the existing portfolio. The couple of products that we've talked about are Xtandi, Imbruvica and Trelegy. Imbruvica was on...

They're already on the way down anyway, right? Deceleration...

Yes. Imbruvica is -- doesn't -- it hasn't been a growth product lately. Xtandi is still growing, Trelegy is growing a lot. But they're all different. So -- like we've said Imbruvica has been declining and that is on the list -- the initial list of drugs that will be negotiated. For Xtandi, Astellas has talked about the impact of IRA in their 2025 number. So I think that, that's sort of understood at this point. And then Trelegy is one where it's already -- it's a product for a much larger market, a lot of discounting already. So that might be one where the dynamic could be a little different than a high-priced oncology drug. And I think the thing that we still don't know about it. The unknown is the potential offsets of just improved access and more patients getting their scripts filled and the lower out-of-pocket costs leading to more volume. So I think that's a dynamic that's harder to assess today, but could be helpful in the other areas.

But as we go from 10 drugs to 20 to 50, I think the sort of industry fear is that first-in-class drug may affect, maybe a better fast follower, which is significant option, right? So does that derivative come into your thinking when looking at the long-term view just that has a potential risk.

Yes, absolutely. We're thinking about. And it's kind of scenario-based. We don't know exactly what's going to happen, but we want to be comfortable that we can generate a return that we like under a range of scenarios, including scenarios where IRA puts pressure on the entire class as an example.

Right. Yes, yes. And I hate to ask this because this was the question for over a year, but the updated thoughts on the vanza. I know Vertex just they're going to use a PRV filing. We've heard, I think, a range of commentary coming from pulmonologists, CF experts about switching. But -- so talk about that in the context of what you guys have modeled? And then bigger picture, are there kind of steps along the way in the dispute that you'll be updating investors on?

Yes. So just to take a step back for people who don't know the background. So right now, we're entitled to royalties on all 4 of Vertex's products. And the biggest of which is Trikafta. There's 3 components. We receive royalties on all 3 of those components. Vertex has developed a new triple combination therapy that had data earlier this year, they have filed and used a priority review voucher that you mentioned. And there is -- we know that we're entitled to royalties on one component of that new triple. There's no new debate there, the tezacaftor component. And that would take our royalty on that new triple to 4%. The question is, are we entitled to royalties on the deuterated ivacaftor, deuterated Kalydeco portion of that new triple combination. We think we are. Our position is that deuterated Kalydeco is the same as Kalydeco, and we should get the same royalty rate. And Vertex has a different position. So the bookends there are either a 4% royalty rate or 8% royalty rate. And what we tried to do to help investors understand the potential impact of a range of scenarios is provide some sensitivities. And I think that what everyone is focused on is the downside. And so let's spend time there is that if we're wrong and we're only entitled to a 4% royalty rate. And 50% to 75% of patients switch, then the impact to our outer year numbers later this decade, 2030, call it, would be a couple hundred million dollars of headwind. And so it's pretty small in the grand scheme of things in terms of our overall business. We think that, that range of switching still makes sense as sort of the scenarios to look at. And in terms of updates or any other thing regarding Vertex, we don't have any updates at this point. But the key for us is that we're continuing to add products every day -- or every quarter to the portfolio. And if there is a little bit of a headwind from any one of the products in our portfolio, we've certainly had them in the past, and we'll have them again in the future. We think we're confident that we can keep growing through them because of the diversification of the portfolio and our ability to reinvest and find new exciting assets every day, like frexalimab, which Marshall was talking about, but we highlighted on our third quarter earnings call that we have a number of products in our portfolio that are not yet approved that we think will ultimately be approved and that have peak royalty potential north of $1 billion. We don't think people are paying very much attention to that right now. But that kind of -- that solves a lot of any potential headwinds from anything in the portfolio as well.